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Investing During a Downturn is a Marathon, Not a Sprint
If you’re a runner, you know there are many parallels between the marathon world and the world of personal finance. Just as runners come to have an innate sense of the difference between a 10-minute mile pace and an eight-minute pace, it is important to get a sense of whether your spending is on target. Most likely, you’re spending less on travel and entertainment right now, so this is a good time to develop and stick to a budget.
Similar to a runner eating a high-energy snack to avoid “hitting the wall” mid-race, investors who are saving should plan for the difficult times too. Your cash reserves should be equivalent to one month of your expenses in checking, and three to five months of expenses in the savings account. If you’re worried you may face a furlough or pay cut, it’s a good idea to boost your reserves so you can “be your own bank” rather than going into credit card debt. No matter the market climate, having healthy cash reserves provides peace of mind.
1. Follow the map to stay on course. Your investment strategy, or allocation, is the road map for your long-term portfolio. If you’re properly allocated, your portfolio has the right balance of risk and reward to meet your income needs in retirement. You should also regularly rebalance the portfolio in good markets and bad to ensure you stay on track.
What if you don’t have the right allocation? A bear market is a true test of whether you’re comfortable with the amount of risk in your portfolio. Consult a fiduciary financial advisor for help in designing an allocation that suits your needs.
2. Run your own race. Prepare for yourself. You’re not trying to beat other investors and your economy is not the economy. Try to tune out the fear-inducing headlines to focus on your own goals and manage factors within your control to meet those goals. This involves saving, being invested in the proper types of securities for your own individual needs, diversifying your investments and minimizing investment costs.
3. Plan ahead. In most cases, a bear market is not the time to try out something drastically different. You can still have good financial habits no matter what the market is doing. It all comes down to living within your means and having a realistic plan for the future.
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, provides relief from retirement plan required minimum distributions (RMDs) this year, consequently lowering your taxes for 2020. This allows you to avoid drawing from the portfolio at an inopportune time. If you would have taken your first RMD this year, you now have a bit more time to plan for an appropriate distribution strategy.
If you don’t have sufficient cash reserves and you need access to your retirement assets, the CARES Act legislation provides for flexibility on penalty and tax payments. The CARES Act also extended the federal tax deadlines, and many states have extended their tax deadlines as well, so if you need the extra window of time to pay your taxes, use it.
4. Knowing your reserves. Runners know when they need to eat to refuel—and retirees should have a sense of how much “fuel” they need. What level of income will your portfolio support? Of course, bear markets can be the most damaging to people who retire right at the onset, due to sequence risk.
But if you had an appropriate level of risk in your portfolio and were already prepared to withdraw “fuel” or income from the portfolio, most likely no changes are needed. It is a good idea to minimize withdrawals for gifting or other things that can be deferred until later, to give the portfolio a chance to recover.
Before retirement, it’s important to stress test your portfolio and have a plan for how you will withdraw living expenses from your portfolio. You’ll also need to include other income sources, such as Social Security or a pension plan.
No matter where you are in your “marathon,” avoid comparing yourself to other people. Some runners get caught up in the energy, excitement and competition during a race, but veteran runners know you have to focus on your own race, not anyone else’s. There may be deviations along the way like we are experiencing now, and that’s OK.
